Why The IRS Audits More Small Businesses Than Big Corporations

Why the IRS Audits more Small Businesses than Big Corporations

Many small business owners believe that they are too small for the IRS to audit. After all, wouldn’t the IRS collect more money for the government by auditing larger businesses?

The answer is: no. The IRS brings in more dollars per hour auditing small mom and pop businesses, than they do auditing medium and large companies.

Why is that the case? Because the larger companies keep impeccable records and have tax experts to defend them; Enrolled Agents, CPAs, or tax attorneys that usually know more about the Tax Code than the IRS auditor-employee.

Small business owners are busy running their businesses. As a result, their records are not impeccable and often will not stand up against the IRS. Also they may try to save money by representing themselves in the audit. That decision could be very costly.

For example: Let’s take a mom and pop business with minor children at home. As the IRS disallows each business deduction, it increases:

Income taxes, and

Self-employment taxes

What they don’t know is that each adjustment may also reduce other deductions and credits, due to phase-outs, such as

Earned Income Credit;

Additional Child Tax Credit;

Dependent Care Credit;

Student loan interest

Education Credits; and more.

Additional taxes can swing in the IRS’ favor very quickly. Then to make matters worse, the IRS pulls a trick out of their playbook. After the business owners agree to additional taxes for the year being audited, they are surprised to learn that they owe taxes for two other years, as well.

For example: Let’s say that they agreed to additional taxes of $4,500 for the year being audited, then after they signed the agreement, they learned that the auditor made the same adjustments for the other two open tax years, bringing their tax liability up to $13,500. Then after an accuracy-related-penalty and interest was added, dating back to the original due date of the tax return, their total assessment increased to $16,500.

That is not a bad “return-on-investment” for the auditor who may have only invested three or four hours ripping you up in the audit.